Lessons for the Payments Industry from the Russian Invasion

Russia's invasion of Ukraine, beyond being an international humanitarian crisis, also prompted widespread international response from the payments industry. Quickly card companies announced bans on Russia as part of a wider effort to retaliate against Russia. In terms of sanctions, what will the longer-term impacts be? Will there be a decoupling of international payment markets? And will the sanctions push development of central bank digital currencies, blockchains or other alternatives?  

Transcription:

Daniel: (00:07)

Welcome our first panel, John Adams. Take it away.

John Adams: (00:11)

Thank you. Thank you, Daniel. Thank you everybody for attending and really thank you for your patience. I'm very sorry. This is our first panel, lessons for the payments industry from the Russian invasion. Our panelist is Elina Ribakova, deputy chief economist for the Institute of international finance. Elina, can you describe your role and what you work on at the Institute?

Elina Ribakova: (00:39)

I work a lot on sanctions nowadays and generally my expertise is in emerging markets, inflation, global spillovers but you can imagine, right now it's mostly sanctions, geopolitics and realization also probably the same. As for you in the financial industry among us economists that we cannot live in isolation from the foreign policy aspects, military nowadays even or any other aspects. We cannot be thinking that we're on the sort of one track tram that we're focused on our multilateral trade agreements, just in economics and the same goes to payments or international finance.

John Adams: (01:13)

There's obviously been a ton of actions, not only in terms of sanctions but in terms of actions of corporations, themselves or particularly the large payment firms for our interest. Have you ever seen this type of response from corporations or payments or any other industry toward a country in this manner?

Elina Ribakova: (01:34)

No, we haven't and this is particularly unique experience with sanctions, when first companies have moved beyond whatever the official sector is requiring. Over compliance is not a typical and if you talk to treasury officials, they know about it, but they just find it hard to quantify it but when the private sector takes the policy forward and something similar also happened on energy already. Although European union is still deliberating on their potential energy embargo. We haven't seen that and we've seen that extras of payments, companies, including the wallets from Russia and American Banker. One of the articles has described it very well. It's almost everybody, even union pay, decided to withdraw from deals with Russian banks. They didn't say formally why but the information is that likely because of the concerns about sanctions.

John Adams: (02:20)

One of the first organizations that came up as far back as 2014, when Russia moved into Crimea was swift. It was banning Russia from swift and it did not happen then because the move was considered to be too provocative. What changed between 2000 and beyond the invasion but what changed it that made a swift ban more tenable? And how effective is it in terms of isolating Russia from the international payments market?

Elina Ribakova: (02:46)

Well, what changed the set, we had more practice in terms of international financial sector sanctions. So 2014, the sanctions that Obama administration at the time imposed were unprecedented in terms of hitting such a financially, globally integrated country. Of course we had Venezuela, Iran, North Korea but they didn't have the same degree of integration. So since 2014, the international community had more practice, had more research put into unintended consequences, but let's not forget that the Russian central bank also had time to prepare. And even though we all talked about swift being the nuclear option, now we can see that the country is still there. The payments are still happening. The messaging system is still being exchanged and it's actually turned out to be much less painful for Russian than many anticipated.

John Adams: (03:34)

When some of the sanctions were first imposed, president Biden mentioned that there were sanctions that were actually beyond the swift ban including measures involving central bank access, how effective have those been?

Elina Ribakova: (03:47)

Exactly, swift partially is less effective because of the preparedness of the Russian domestic messaging system. So we have all countries already registered in the messaging system. You also have domestic payment system, you have domestic cards and we can talk more about that but in terms of sort of other responses that Russia did since 2014, they built a fortress and the big aspect of that fortress they brought back the reserves to their all time highs. They lost a lot of reserves in 14 and they decided, okay, fine. You're gonna hear us with financial sanctions. We'll bring more insulation and therefore also isolation from the global capital markets and we'll build this buffer of reserves of more than 600 billion. What the US administration has done is not entirely unprecedented, but it froze more than 300 billion together with international partners with European union and others off reserves of the central banks.

Elina Ribakova: (04:36)

So the central banks hold reserves with various banks, in the jurisdictions, in the US, that would be the US banks. Those reserves are now frozen. There's even a discussion of taking it further, potentially changing ownership of those reserves and transferring them for Ukraine's reconstruction. That is an extremely serious step. It's legally also open to disputes. There've been sort of preparations like that after the first world war in Europe. I'm sure there are few other cases that legal experts know including potentially Afghanistan but it is also a very important step in, the role that economic statecraft now plays in wars. This is a step that might be taken by Russian as serious as the US engaging in the battlefield and potentially could provoke a very serious response from Russians as well.

John Adams: (05:25)

We spoke about that before this call, the weaponizing of finance, what does that mean? And how dangerous could that become, particularly if there is a response, what could the response from Russia be against European systems or American systems, how effective could they be?

Elina Ribakova: (05:44)

I'm very glad you bring up the weaponization of finance, terminology here is because it's practical for us to be concentrated and I've also attended other sessions, which talked about decentralization of finance but when you have this sort of very critical nodes and US financial system and dollar is a very critical node still in the global financial architecture. When we have that, then there is of course also leverage and here US used that leverage. It was not lost on PBOC on the central bank of China. They raised important concerns about that during the spring meetings. Of course, they're very careful. They tried very careful and they're trying not to get on the wrong side of the US but they're concerned what would happen if they have a border dispute with one of the neighbors what's gonna happen with their trillions of reserves. It's unlikely to undermine the dollar today, but over time that could raise issues potentially. Also, if there is a transfer of ownership, not just freezing of assets,

John Adams: (06:43)

Occasionally we read about the Russia made default, obviously that would be bad in Russia, but in what ways would it be bad? What sorts of things would Russia not be able to fund or do if it were to default?

Elina Ribakova: (06:59)

Well, so the reputational risks of invading a neighbor are just so high that whatever credit, spread impact your default might have, I think it's negligible. I think the concerns that Russia has is just over and above whatever default might bring. But again, it's a very important issue. We know that there is a general guidance by orAG that allows foreign investors that invested in Russia to receive payments and that license, I think, expires on the 25th of May and that's when Russia might actually face default was again, legal disputes because of the sanctions. Russia has very little leverage in terms of financial systems and I think they're very aware of that after 2014, what they focused on is insulating and therefore isolating itself. They didn't really try to go out there and say, oh, we're gonna hit you back because, they know, they can't. So with the default here, they said, okay, we're gonna pay you in Rubles. That was their standing their position couple of weeks ago and of course afterwards, they actually ended up paying in dollars. They gave, they blinked, they said, okay, fine. But even then still, they might face default because of this guidance from orAG that might not be extended. In terms of impact. I think it's the marginal contribution is small invading your neighbor is a much bigger problem.

John Adams: (08:09)

The mir card, which is relatively new, is grown to make up about maybe 25% of the Russian mark with visa, in MasterCard taking up to other 75%, is the mir card that strong enough to overcome the loss of visa, MasterCard for consumer payments in Russia?

Elina Ribakova: (08:28)

It's a very interesting sort of system of domestic messaging and payment system that Russia has built after 2014. I didn't know, until I looked at the statistics that, digital pay, cashless payments at more than 70% of payments in Russia, which is a dramatic change in just 20 years when everybody even used to pay for their house purchases in cash. The digitalization in Russia is extremely high and that combined with authoritarian regime allowed mir card to progress very fast because at some point the government said, look, you're gonna receive your payments on pensions, social assistance, government employees are gonna get their wages on mir card. So that's it, so you're gonna get that card. They also required foreign cards to plug into that payment system. So even though it would be a visa or MasterCard issued, it will still be settled through the underlying infrastructure of the central bank of Russia. So what happened actually the withdrawal of payment systems hurt first and for most Russians that were traveling abroad, they were trying to flee the regime. The cards are still functioning in local, in Russia because of the domestic system, including underlying Mir has helped them. Of course, going forward it will be problematic. There are reports of maybe not having enough chips already to issue new cards but they also have the QR based payments that they can continue executing. So for now the system is still holding up.

John Adams: (09:51)

Now one of the things that's come up in the past with other sanctioned regimes, particularly in North Korea is the use of cryptocurrency. Is there a path for Russia to use cryptocurrency? They get around these sanctions and how would that differ? I would think that a lot of the other countries were smaller, than the smaller economy. Is there more of a challenge in Russia to use crypto as a work around?

Elina Ribakova: (10:16)

Exactly. I think the key point is indeed smaller the scale, so Russia's current account surplus up until April is about a hundred billion. So Russia exports per year, about three, 400 billion of goods, the same for imports. The volume of transactions just huge. If you look at the previous crisis, 2008, 2014, domestic resident withdrawals were in excess of 200 billion easily. Basically these are people that were trying to either convert to foreign currency or trying to take money abroad from Russia. So the use of crypto, we know when Bitcoin is went up to trillion, is back to 600 billion, even, the most sort of the largest, out there is still doesn't have enough capitalization to help Russia. That said Russia is the third largest miner, globally. After I think US and Kazakhstan, especially after China cut it down. Kazakhstan is also sort of a friendly country.

Elina Ribakova: (11:10)

We see the US authorities and European authorities taking it very seriously. They've already sanctioned some of the crypto mining and activities. They've also gave a warning to others that they should limit activities with Russia, European union and their fifth sanctioned package did similar measures. So I think the authorities are watching it, but the volume I think is just not quite there. Of course, an individual case by case basis. We can see people trying to, circumvent capital controls from the Russian side as well in order to take their savings abroad.

John Adams: (11:40)

Now turning you to Ukraine briefly. We've been American Banker. We've spoken with a lot of fintechs that work in Ukraine. A lot of people who have staff in Ukraine, how is the advancement of digital payment technology, cross border payments? How is that and how can it help Ukraine, its economy, move forward or be functional and is that something that perhaps would not have been available four or five years ago?

Elina Ribakova: (12:05)

I think, the sort of collection of donations to Ukraine, particularly given the vibrant IT sector there, or the vibrant sort of crypto community there has helped. I think, the minister for innovation said more than a hundred million donations came. Of course, there's also 10 billion and more of donations from multinational organizations but nonetheless, it's flexible. It's quick. Also for people fleeing the war, who already have their wallets. That was much easier than trying to take money out in cash, especially that, even now there are still difficulties in terms of exchanging your RNA once you leave with other central banks, because the central banks say, look, we don't want this cash. Even the central bank and the regions and European union needs to take an official stance they might have in the last weeks. But I know it's been a longstanding problem where people will have difficulties converting that because the banks will say, we cannot take it because then our domestic national bank, central bank is not taking it. So of course crypto makes it much easier, but for those who haven't yet embraced crypto wallets or digital wallets, it's in the middle of the war. You're not gonna start doing that or educating your grandmother on how to do it so you can make a transfer.

John Adams: (13:10)

Okay, we have a couple minutes left. There are any questions, anybody have any questions maybe

Elina Ribakova: (13:19)

That's in the back

John Adams: (13:25)

Okay

Audience 1: (13:33)

Thank you so much for your insight. I'm just wondering about the central bank, digital currency out of China and how that might be affecting and how it might go forward.

Elina Ribakova: (13:44)

I think this is a fantastic question. I also attended your session yesterday. I've been watching, if not for the war, I think Russia could was way on track to also sort of follow China and they had very similar CBDC planned out. They have a pilot that started earlier this year was 12 banks and 12 banks in Russia really covers your 90% of the system. So that's a similar kind of pilot as it is in China, sort of your pilot but you pretty much cover the whole system but now I think there is a chance of Russia maybe teaming up was the payment system, the messaging system in China, which they also started developing not long ago, partially looking at what's happening to Russia and then maybe plugging into the CBDC but still CBDCs would be sanctioned the same way.

Elina Ribakova: (14:27)

So if China were to help Russia circumvent sanctions, it will be sanctioned just like any other currency. And I think, now the prospect for central bank of Russia to move sort of fast with the digital development will not think of bank, for example, defi that everybody gives as an example, he was forced to sell out at the very low price to the local by oligarch because he spoke against the war. So the chances of Russia now moving forward with progress, I think are very limited partially because of the sanctions and also special expert controls.

John Adams: (14:56)

We have other question? Elina, thank you very much for joining us and this is a very interesting conversation and again, thank you.

Elina Ribakova: (15:13)

Thank you so much and look so forward to staying in touch. Thank you.